Chinese Stocks Bounce On Short-Squeeze Over Funding Hopes

Rumors of a new "preferred shares" program which could implicitly mean easier access to desperately needed liquidity for Chinese banks and real estate developers prompted what one analyst called "a short-covering-led recovery after shares had fallen a lot." The banks of the Shanghai Stock Exchanged rallied notably as chatter was they would be be first to be blessed with the ability to issue new stock and this boosting their capital. The 2.7% rally in the composite was the best day in 4 months (even as China CDS surged by their most in 9 months) but, as one trader noted, "we may see one or two more days of upside but China's fundamentals are still weak. We weren't falling for nothing."

China’s stocks rallied, sending the benchmark index to its biggest gain in four months, amid speculation the government is loosening funding restrictions for property developers and banks to support economic growth.

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The Shanghai Composite Index (SHCOMP) climbed 2.7 percent to 2,047.62 at the close, the biggest gain since Nov. 18, after reaching record-low valuations yesterday. Policy makers are trying to bolster real estate and financial companies as the economy slows and bad debts increase. Allowing lenders to sell preferred shares would give them a new way to meet long-term fundraising requirements.

“Investors hear talk that banks may be the first to be included in the preferred-shares program,” said Xu Shengjun, analyst at Jianghai Securities in Shanghai. “Investors are hoping this will bring a lot of benefits to the companies, including boosting their capital.”

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Companies in the Shanghai Stock Exchange 50 A-Share Index, which includes at least 10 banks, can issue preferred shares, according to a statement posted on the official microblog of the CSRC. They can use the funds to pay for acquisitions and buy back stock, the CSRC said.

Selling the securities would enable banks to have a supply of capital without adding pressure on common stock investors, according to Masterlink Securities Corp. Lenders are facing increasing competition for deposits after the central bank engineered a cash crunch last year to curb off-balance sheet financing that evolved to circumvent official credit curbs.

“This is a short covering-led recovery after shares fell a lot,” said Wong. “We may see one or two more days of upside but China’s fundamentals are still weak. We weren’t falling for nothing.”

Just as that trader noted, this is far from over - as the smattering of headlines from last night suggest:

*CHINA YUAN WEAKENS 0.06% TO 6.2315 VS U.S. DOLLAR

ICBC, CCB STOP SELLING TRUST PRODUCTS: SECURITIES DAILY

China CDS surged 10.5bps (the most in 9 months) and are back over 100bps (5 times that of the USA and double the risk of Japan).

China corporate bonds are at one-month lows.

China warns of risk in insurance industry due to heavy exposure to corporate credit (especially local government debt). Rather stunningly, new debt investment plans by insurance companies last year totaled 287.76b yuan, equal to the sum total amount of the previous seven yrs combined.

More stories of Hong Kong property sellers slashing prices is also raising tensions with at least 10 housing estates seeing sellers cutting prices yesterday. New homes are being discounted at 11.75% discount (and as we noted yesterday, existing homes at over 20%). Barclays warns this is only the start, noting it expects home price to fall by at least 30% by end-2015 from Oct. 2013 level. Current home-price-to-income multiple (13.3x vs historical avg 8.7x) is "very far away" from where end-users can support market

*CHINA TO 'DRASTICALLY' CURB NUMBER OF NEW SHIPYARDS: DAILY - China must restrain blind investment in shipbuilding industry. Li said small and medium-sized shipyards with few orders will gradually withdraw from the market in next 5 yrs: Daily

More smaller Chinese developers will default as prices decline

Xinhua

2014-03-21

14:02 (GMT+8)

Renminbi banknotes. (Photo/Xinhua)

A debt afflicting a small Chinese property developer, which has made headlines in the country, has highlighted ongoing cash-flow problems in the sector. Industry analysts say they expect some smaller companies to default and home prices to decline in third and fourth-tier cities.

Zhejiang Xingrun Real Estate, a privately owned small developer in the eastern coastal city of Ningbo, is struggling to pay a 3.5-billion-yuan (US$573.8 million) debt after its capital chain broke down.

Of the debt, some 2.4 billion yuan (US$285.8 million) was borrowed from banks, who are working with local governments to find solutions. Two owners of the real estate firm have been detained by police on suspicion of illegal fundraising.

A preliminary investigation showed that plummeting land prices was one of the major contributors to the liquidity crunch. It is estimated that the company has lost about 1.4 billion yuan (US$225 million) from its purchased land because of shrinking property values.

Most of Zhejiang Xingrun's business was in Fenghua, a small city under the administration of Ningbo with a population of about 500,000. Its land prices in 2013 were half the 2010 level.

"There are large stockpiles in small and medium cities, and the performance of developers based in third and fourth-tier cities was sluggish in the first two months of 2014," said Zhang Dawei, chief analyst with Chinese property agent Centaline.

A possible default by Zhejiang Xingrun is "symptomatic of major themes in the industry — polarization in favor of larger, better funded homebuilders, oversupply in smaller cities, and significantly slower growth rates and profit margins," global ratings agency Fitch Ratings said in a note.

Zhejiang Xingrun ran into trouble as it is a privately owned company, meaning it has limited access to equity funding. Chinese regulations limit the ability of private residential property developers to use bank loans to purchase land, Fitch said.

Private companies are, as a result, likely to be more reliant on non-traditional sources like trust funds, which come at a higher cost.

Another reason the company is going through hard times is that Fenghua, the main focus of its business, is showing signs of overdevelopment.

Key shareholders of Zhejiang Xingrun were also arrested relating to illegal fundraising, which has added to the company's woes.

"We believe there will be further defaults in this industry as these themes will persist, but they will be limited to smaller companies like Zhejiang Xingrun," Fitch said.

Zhang Zhiwei, chief China economist with Japan's Nomura Securities, shared similar views. Zhejiang Xingrun is the largest property developer in recent years that is at risk of bankruptcy, Zhang said.

"More property developers will face similar pressures as transaction volumes slow and cash flow conditions tighten, and expect this problem to be more severe for unlisted developers in third and fourth-tier cities with limited access to financing," he said in a research note.

Zhang maintained that China's property sector suffers from overinvestment and has a significant oversupply problem.

The risk is particularly high in third and fourth-tier cities, which accounted for 67% of housing under construction in China in 2013, he said.

The falling price of land in Fenghua is consistent with the deceleration of home price growth in China over the past few months.

Last month, new home prices in 70 major cities tracked by the National Bureau of Statistics rose by an average of 11.1% year-on-year, slowing by 1.3 percentage points from January.

Prices for existing homes rose 6.4% year-on-year, compared with an average growth of 7.4% in January. On a month-to-month basis, 57 out of the 70 cities saw rises in new home prices in February, fewer than the 62 cities in January.

Deceleration of home price growth has changed the psychology between home buyers and property developers and boosted a wait-and-see sentiment, even in first-tier cities with a hot housing market like China's capital Beijing.

As of March 16, sales of new homes in Beijing plunged by 57.5% year-on-year while sales of existing homes in the city dropped by 66%.

A lackluster property sector has made banks more cautious of offering credit to property developers.

With eyes on cash flow, some developers have chosen to cut prices to cash in. Two local developers in Hangzhou, the capital of Zhejiang province, announced sales promotions in late February.

The combined sales revenue of 30 monitored home developers stood at 66.5 billion yuan (US$10.7 billion), nosediving by 39% from January, according to Zhang Dawei.

Major residential property developers, especially listed ones, are eager to publish impressive financial results. A business slump could cause their stocks to drop.

Li Tiegang, director of the real estate research center of Shandong University, said sales promotions in big cities could lead to similar actions in smaller cities. "We may see some price cuts in two or three months," said Li.